In coming to grips with how to improve corporate governance in the wake of recent scandals, companies need to adopt reforms aimed not only at correcting abuses, but to put in place effective new ways of assuring their long term survival and success


Governments are now seeking to increase their regulatory role in the area of corporate governance, even as companies seek to reform their own internal practices. Consequently, we are seeing a growing tension between governmental regulation and corporate self-regulation. This tension is probably inevitable. In Spain, the Aldama Commission – a blue ribbon panel on corporate governance appointed by the government – recently submitted its findings. These include a proposal for regulating certain administrative practices, while leaving wide scope for self-regulation. Is this the right approach?

Regulation in this field functions like railway tracks – it keeps the train from derailing by making it harder to abuse shareholder rights. And yet, regulation per se does not guarantee good corporate governance. This must be the outgrowth of the corporation’s most fundamental purpose, the central aim of any responsible senior management team – to survive in the long term as a coherent and flourishing entity.

Capital markets are widely assumed to exert a control function, but capital markets alone are insufficient. A good executive board should certainly take capital markets into account, but should never allow them to become the dominant factor in corporate decision-making. This is because markets tend to be governed by short term thinking. Senior management, however, must exhibit long term thinking with a view to the company’s survival and prosperity over time. Markets are indifferent to strategy and its effective implementation, whereas boards of directors have no more important task. Markets go through ups and downs, and often are moved by short-term enthusiasms and fears that have little to do with the prosaic task of management; boards of directors, by contrast, set practical goals that must be implemented by real people using the talents that they actually possess.

The Aldama Report suggests that the best approach to sound corporate governance is through a combination of governmental regulation and corporate self-regulation. Governmental regulation has an important role to play in reinforcing laws to enhance good faith and transparency. Meanwhile, the report calls for giving wide scope to self-regulation in assuring the proper functioning of governing bodies – principally, the board of directors.

The board of directors is utterly decisive in ensuring the long term viability of the company, which is why the Aldama Report calls for steps to improve its effective functioning. The risk of a Chief Executive Officer accumulating too much power – much in evidence in the United States – should be reduced by enhancing the role of the board of directors. To achieve this objective, the well-functioning board must be governed by two principals – unity and collegiality. Unity requires that all members of the board share responsibility for the operation and evolution of the company, regardless of whether a given board member is an executive or external member. If executive members come to see themselves are representing certain majority shareholders, and external members as representing minority ones, the effective functioning of the board can become impaired and the prospects for good governance compromised. The board of directors must be a team, with each member having a sense a responsibility for the long term viability and success of the company.

The other key principal is collegiality. The board of directors is more than a formal governing body – it is also, as noted above, a team. In this sense, the role of the chief executive is vital, as it is he or she who sets the pace and the standards to be followed, raises key questions, encourages participation, disseminates information among the members, and, above all, fosters the vital element of trust, without which the board will have a hard time fulfilling its mission. This vision of the role of the chief executive is very different from the reality that has come to prevail in recent years. Just as it is hard to imagine, say, a sports team having a winning season in the absence of trust and collegiality among its members, the same applies to a board of directors. Clearly, these intangible aspects of a board’s governance – unity, collegiality, teamwork – cannot be imposed by governmental regulation, but must come from within.

The self-regulating board must display two characteristics if it is to be successful – transparency and unimpeachable ethical standards. Transparency requires providing investors, clients and employees with reliable and complete information concerning all areas in which they have a vital interest. This means more than straight financial reporting. It means explaining the reasons and criteria that inform the board’s decision-making processes and governance practices. Transparency instils investor confidence, and allows the board to govern more effectively.

Finally, good governance requires ethical standards that guarantee justice, truthfulness, diligence and loyalty. Certainly, the law can play a role in guaranteeing that such standards prevail. And yet, for high ethical standards to become the norm, they must be lived and practiced, rather than merely legislated. Otherwise, even the most sophisticated and well-intentioned laws will not be worth the paper they are printed on. Dishonest directors would certainly find ways to circumvent them. It should be noted that a number of the U.S. firms implicated in recent scandals were largely in compliance with the laws on corporate governance then in force. The problem was not the absence of sound regulations and clearly defined procedures. Rather, it was the absence of high ethical standards in corporate life, and their replacement by corrupt practices.